Paycheck Protection Program | COVID-19 Forgivable Loans
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Paycheck Protection Program: How to Apply for a Forgivable Loan During COVID-19

As of August 8, 2020, the Paycheck Protection Program is closed to new applicants.

Does your small business need financial assistance as a result of the coronavirus pandemic? If so, one of the biggest federal initiatives for small businesses is the Paycheck Protection Program.

Read on to learn about Paycheck Protection Program loans, including eligibility, important dates, and the application process. 

What is the Paycheck Protection Program?

The Paycheck Protection Program (PPP) provides forgivable loans to small businesses to help cover up to 24 weeks of payroll costs, interest on mortgages, rent, and utilities. PPP is a small business relief measure established under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). It incentivizes businesses to retain employees on payroll.

What can employers use PPP funds for?

  • Payroll costs for full-time and part-time employees
    • Salaries, wages, commissions, or tips ($100,000 max per employee—gross earnings)
    • Employee benefits (e.g., vacation, sick leave, health care benefits, retirement benefits)
    • State and local taxes
  • Interest on mortgages (for loans incurred before February 15, 2020)
  • Rent (under lease agreements pre-February 15, 2020)
  • Utilities (if service began before February 15, 2020)

Independent contractors do not count as employees. Do not include their payments when calculating your payroll costs. 

Keep in mind that funds are limited. PPP loans are first come, first served. You can only take out one loan. 

The initial funds of $349 billion, allocated under the CARES Act, ran out on April 16. On April 24, the government added an additional $310 billion to the program’s funding under the Paycheck Protection Program and Health Care Enhancement Act. 

The U.S. Department of the Treasury encourages businesses to apply quickly—before the funds are exhausted. And, it will take lenders time to process applications, meaning you won’t receive funds instantaneously. 

How much can you receive?

According to the Small Business Administration, applicants receive assistance equal to their average monthly payroll either from the previous 12 months or from calendar year 2019, plus an additional 25%. This is generally considered 2.5 times of one month worth of total payroll. 

The maximum loan amount is $10 million per applicant. 

Loan details and forgiveness 

A payroll-protection loan has a repayment plan of five years and a fixed interest rate of 1%. You do not need collateral to apply. 

If you receive a PPP loan, your loan payments are deferred until you receive loan forgiveness from the SBA (or 10 months after the covered period if you don’t apply for forgiveness), although interest will accrue during this time. However…

…if you retain your employees and maintain salary levels, the Small Business Administration (SBA) will forgive part or all of the principal amount of the loan (plus accrued interest)—depending on what you use it for. 

The SBA will forgive the portion of the loan that covers your first 24 weeks of payroll, mortgage interest, rent, and utility payments. The SBA will not forgive a portion of the loan that you use for other expenses.

Prior to the June 5 passage of the Paycheck Protection Program Flexibility Act of 2020, this coverage period was only eight weeks. 

Your 24-week period begins on the date the lender makes the first PPP disbursement. According to the SBA, lenders must make the first PPP disbursement within 10 days of approving the loan application.

SBA guidance released on May 15 gives borrowers with a biweekly or more frequent payroll schedule the option to begin their 24-week period on the first day of their first pay period after receiving the first disbursement. This is known as the “Alternative Payroll Covered Period.”

If you are not able to retain or rehire all of your employees, or if you lower wages, the loan forgiveness amount may decrease. According to the Treasury, your loan forgiveness will decrease if you:

  1. Decrease your full-time equivalent (FTE) employee headcount (which takes both full-time and part-time employees into account)
  2. Decrease salaries and wages by more than 25% for any employee who made less than $100,000 annualized in 2019
  3. Do not restore your employment and salary levels by December 31, 2020*

*Extended from June 30, 2020 to December 31, 2020 through the passage of the PPP Flexibility Act. 

When determining your loan forgiveness, your lender will look at your FTE employee headcount and salaries during the covered period

On April 16, 2020, the American Institute of Graphic Arts (AIGA) held a live webinar with Christopher Pilkerton, General Counsel of the U.S. Small Business Administration. We asked, “If you had laid off employees and later receive a PPP loan, what should you do?” Here’s Pilkerton’s response:

Very common situation. A business loses a customer base, has to lay off people. If you can go out and re-retain those employees, bring them back on board but account for them in your payroll—because presumably you have the prior records for that—then that’s acceptable. That’s really the policy goal behind this, trying to ensure those employees are connected back to the company for when we come out of this.”

So, if you previously let employees go, consider rehiring them to meet your PPP loan forgiveness requirements. That means the employees must get off unemployment, as they would no longer be eligible for its benefits.    

And according to a recent SHRM survey, nearly half of small business owners said the PPP has directly influenced their decision to keep or rehire employees. 

OK, so what if you try to rehire a laid-off employee and they refuse your offer? Or, what if you try to increase an employee’s cut hours to what they were, and they refuse? According to new SBA guidance issued on May 3 and on May 22, your PPP loan forgiveness amount might not be reduced if you try to rehire an employee or increase their hours and they refuse. You’ll need to show written documentation showing that you attempted to rehire the employee or increase their hours and they rejected your offer. 

The Paycheck Protection Program Flexibility Act of 2020 was signed into law on June 5, changing the PPP fund requirements. Now, you must use 60% of the borrowed loan amount for payroll costs (previously 75%). Only 40% can be for mortgage interest, rent, and utilities (previously 25%). 

On May 15, the SBA released the Paycheck Protection Program Loan Forgiveness Application form. You can use this form to determine how much of your loan is forgivable and request loan forgiveness.  

Requesting loan forgiveness

After receiving the PPP loan, keep detailed records to prepare for requesting loan forgiveness. To simplify your records, consider:

  1. Creating a separate expense account to accumulate all eligible costs
  2. Keeping the loan funds in a separate bank account and only withdraw to cover eligible expenditures

You can request loan forgiveness by submitting a request to your lender after the 24-week loan period. Your loan forgiveness request should include documents showing:

Your lender has 60 days to make a decision on your loan forgiveness. 

Who can apply?

All small businesses with 500 or fewer employees can apply for a PPP loan. This includes:

  • Self-employed individuals
  • Independent contractors
  • Sole proprietorships 
  • Nonprofits
  • Veterans organizations
  • Tribal businesses 

The SBA may also extend PPP loans to businesses in certain industries with more than 500 employees. If you have more than 500 employees, you can use the SBA’s “Table of size standards” to find out if you’re eligible.

According to Treasury guidance issued on April 26, 2020, borrowers must certify, in good faith, that their PPP loan request is necessary due to economic hardships. To do this, borrowers must assess their business activity and determine whether they can access other sources of liquidity to support their business. On May 13, 2020, the SBA announced that borrowers meet the good faith requirement if they receive PPP loans with an original principal amount of less than $2 million. Borrowers who request loans greater than $2 million may still qualify, but they must make the required good-faith certification to prove their eligibility. 

Any borrowers (e.g., public companies) who received a PPP loan before this new guidance should repay the loan in full by May 14, 2020. 

If the SBA declines your application, you can appeal their decision

When can you apply?

Small businesses and sole proprietorships can begin applying on April 3, 2020. Independent contractors and self-employed individuals can apply beginning April 10, 2020.

Deadline: The program is available through August 8, 2020

Paycheck Protection Program loan vs. Employee Retention Credit

If you receive a Paycheck Protection Program loan, you cannot also receive the Employee Retention Credit. The Employee Retention Credit is another CARES Act relief measure for businesses. 

The Employee Retention Credit is a fully refundable tax credit employers can claim if they don’t receive a PPP loan. 

Again, however, you can defer the employer share of Social Security tax while waiting to hear if your PPP loan is forgiven. This Social Security tax deferment while waiting to hear if your PPP loan is forgiven is not the same thing as the Employee Retention Credit, according to the IRS. Rather, the tax deferment is a relief measure all employers are entitled to under the CARES Act, unless their PPP loan is forgiven.

This tax credit is equal to 50% of qualified wages eligible employers pay employees between March 12, 2020 – January 1, 2021. Eligible employers are those who must fully or partially suspend operations during any quarter in 2020 as a result of coronavirus. Employers whose gross receipts significantly decline are also eligible.

To claim the Employee Retention Credit, you would report your qualified wages and related credits for each calendar quarter on your federal employment tax returns (e.g., Form 941, Employer’s Quarterly Federal Tax Return). 

Because you cannot claim both the tax credit and forgivable loan, you must determine which would most benefit your business.

You can learn more about the Employee Retention Credit on the IRS’s website.

PPP and employer payroll tax deferral 

Before the Paycheck Protection Program Flexibility Act, employers who received a PPP loan could only defer the employer portion of Social Security tax payments until their loan was forgiven. But now, you can defer payments throughout all of 2020, even if you receive PPP forgiveness.

The amount you deferred before receiving the decision is due, without penalties, on:

  • December 31, 2021 (50%)
    December 31, 2022 (remaining amount)

Overview of the PPP application process

Applying for a new loan can be overwhelming, especially one that has just been implemented. Take a look at the following sections to learn more about the application process.

All 20% owners must participate in the application process. 

Where do you go to apply? 

You can apply for a PPP loan through any:

  • Existing SBA 7(a) lender
  • Federally insured depository institution (e.g., bank)
  • Federally insured credit union
  • Participating Farm Credit System institution 
  • Regulated lender that has been approved and is enrolled in the program

If you’re unsure whether a lender is participating in this payroll protection program, you can consult the Small Business Administration

Employers should try to obtain PPP loans through their bank. However, if their bank isn’t accepting applications, other small business lenders, such as Blue Vine, may be an option.

Form

The application form will ask you for basic business information such as:

  • What type of business you operate (e.g., nonprofit, self-employed, etc.)
  • Your business’s legal name and DBA (if applicable)
  • Business taxpayer identification number
  • Business address, phone number, and email address

The form then dives into payroll and loan details:

  • Average monthly payroll
  • Total loan amount (average monthly payroll X 2.5)
  • Number of jobs 
  • Loan purpose (e.g., payroll, rent, etc.)

There are a number of Yes/No questions on the form. Use these questions to determine whether you are eligible for a loan.

If you applied for an SBA Economic Injury Disaster Loan between January 31, 2020 – April 3, 2020, attach a separate sheet with details to your application. 

In addition to the application, you must also provide a good amount of documentation, explained in the next section.

What information will you need?

Again, you need documents to back up your application information. You must have payroll data.

If you’re a Patriot payroll customer and need help pulling your payroll data for the SBA PPP loan, read our help article: “I Need Payroll Data for the SBA PPP.”

Some of the documents you will need to pull for your Payroll Protection Loan application include:

  • Copies of your business’s IRS Form 941 for all four quarters of 2019
  • The dollar amounts included in the 2019 Forms 941 that are attributable to:
    • An individual employee’s wages over $100,000 annually
    • An employee’s compensation whose principal place of residence is outside the U.S.
  • 2019 and 2020 payroll ledgers that show payroll costs by employee:
    • Salary, wages, commission, and tips
    • Vacation, parental, family, medical, or sick leave
    • Group healthcare benefits
    • Retirement benefits
    • State or local taxes on employee compensation

Do not include the following in your payroll costs:

  • FICA tax (Social Security and Medicare taxes)
  • An employee’s compensation amount over $100,000 per year
  • An employee’s compensation if their principal place of residence is outside the U.S.

Paycheck Protection Program resources

Use the following resources to help you navigate the ins and outs of the application process:

COVID-19 loan alternative: EIDL

If you are unable to receive a Paycheck Protection Program loan, you have another option. The SBA is also providing Economic Injury Disaster Loans (EIDL).

Economic Injury Disaster Loans are available for businesses impacted by a declared disaster. Therefore, the SBA is offering these loans due to the coronavirus.

This loan has an interest rate of 3.75% for small businesses and 2.75% for nonprofits. And, they come with a long-term repayment plan of up to 30 years. 

Economic Injury Disaster Loans are not forgivable. However, in response to the coronavirus, small business owners can apply for a COVID-19 Economic Injury Disaster Loan

The EIDL program ran out of funds on April 16. On April 24, the government added $50 billion more in loans and $10 billion more in grants to the EIDL under the Paycheck Protection Program and Health Care Enhancement Act.

You can use Economic Injury Disaster Loans to cover business expenses such as:

  • Employee wages
  • Rent
  • Accounts Payable
  • Other bills

Again, if you’ve already received an Economic Injury Disaster Loan, you are not disqualified from the Paycheck Protection Program. Just be sure to include the information as an application attachment. You must also include EIDL information when applying for PPP loan forgiveness, as an EIDL advance may lower the forgivable amount of your PPP loan. 

Sixty-seven percent of small business owners have either already applied for a COVID-19 relief loan (PPP loan or EIDL) or are planning to apply. 

PPP infographic

Take a look at our Paycheck Protection Program infographic for a visual showing what is the PPP, what you can use funds for, who can apply, and how to apply. 

paycheck protection program infographic detailing what business owners can use funds for, who can apply, and application process

This is not intended as legal advice; for more information, please click here.

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